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Subsidized GMAC Threat to State Banks

In the wake of the bankruptcy of General Motors, with billions of taxpayer dollars being thrown into the mix, one aspect is particularly troubling to traditional Oklahoma banks. GMAC – Government Motors Acceptance Corp. – is the well-subsidized financing arm of the bankrupt automaker. GMAC has already asked for and received a taxpayer capital infusion of nearly $13 Billion so it can retain a pulse, and it wants to leverage that taxpayer money to put traditional Oklahoma banks out of business. GMAC Financial Services, through its Ally Bank subsidiary, has been flooding the airwaves with advertisements – funded with taxpayer dollars – enticing depositors with more-than-generous interest rates.In most cases, these are the highest in the nation and in some cases they are double the local market rates. Can better rates on savings be good for consumers? Sure, in the short-run. But there’s a larger issue that must be examined as well. Al de Molina is GMAC’s chief executive and wouldn’t be employed today in his current capacity save for the largesse of the American taxpayer. When called to task last month over these predatory pricing policies by American Bankers Association President and CEO Ed Yingling, GMAC’s chief executive, de Molina was rudely dismissive:“You might want to assist your members in figuring out how they are going to compete in the new marketplace rather than ask regulators to direct Ally Bank to pay its depositors less competitive rates,” de Molina snarked in his response (my emphasis). De Molina, clearly, seems to be in denial that financial institutions like GMAC/Ally Bank would not be in existence if the solvency standards applied to traditional Oklahoma banks in the 1980s had been followed by financial industry regulators in the last year. Like the U.S. Post Office, which loses money yearly and comes hat-in-hand to rich Uncle Congress to tide it over for another 12 months, GMAC has been losing, and continues to lose, money every day it operates. Great work Mr. D.GMAC acquired DiTech Funding in 1999. DiTech was the inventor of those 125 percent loan-to-value mortgages and marketed them aggressively. Unfortunately, their marketing effort was just in time to help sponsor the nation’s housing bubble.In 2008, de Molina’s outfit lost more than $112 million and already has exceeded that loss by $21 million in the first quarter of this year. Great job.GMAC, one of the 19 largest financial institutions recently stress-tested by the Federal Reserve, needs to come up with $9.1 billion of new capital before the end of the year-end. It also needs the FDIC’s help if it’s going to be able to do so. To help GMAC out and raise the remaining capital, the FDIC, (funded by levies on deposits of insured banks, including a “special assessment” which will cost Oklahoma community banks at least $36 million) has taken an unprecedented step in giving this junk-rated company access to its temporary liquidity debt guarantee program. GMAC will be allowed to issue as much as $7.4 billion in obligations the FDIC will guarantee against default. The Federal Reserve also waived rules to give GMAC’s Ally Bank, giving it more leeway to make loans to GM customers. At least the Post Office makes a pretense of competing. If the Post Office cut rates on overnight package delivery to half the going market rate UPS, DHL and FedEx would be apoplectic. As it is, the Post Office’s government subsidy already makes profitable package delivery challenging for these and many other firms competing for space in this market.Predatory, loss-leader pricing practices by a government-sponsored, government-subsidized entities would not be tolerated in package delivery and should not be tolerated in banking or any other business or industry. A broader, and more serious question, with implications for all private enterprises now confronted with new, government-sponsored, government-subsidized competitors and daily adversaries, is this: How can private enterprise compete if the playing field now is so blatantly uneven? If the government is trying to improve the economy, then putting private businesses, including community banks, out of existence is an odd way to do it.